Supervisors Faculty of Management & Organization:

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‘Evaluation of the Performance Management Framework of Shell EP Europe’

Groningen, October 2004 Author: Karin Stok

Student number: 1153358 University of Groningen

Faculty of Management & Organization Shell Exploration & Production Europe Supervisor:

Dhr. M.F. Versteeg

Supervisors Faculty of Management & Organization:

Dr. J.M. Horgan (first)

Prof. dr. A.M. Sorge (second)

- The author is responsible for the contents of this thesis; the copyrights of the thesis remain with the author -

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Management Summary

This study has been carried out for Shell Exploration and Production Europe (EPE).

This is a company that explores and produces gas and oil in Norway, United Kingdom, Netherlands, Italy, Austria, Ireland, Denmark and Germany. The activities of these countries have been put together in the company Shell EPE since November 2003. This study focused only on employees within Norway, United Kingdom and the Netherlands.

Since January 2004, a new Performance Management Framework has been introduced in this company. Performance management (PM) can be seen as the process in which managers and employees work together on setting goals, giving feedback, reviewing and rewarding performance. This study deals with the evaluation of and provides insight into employee’s degree of commitment to this PM Framework.

The ideas Rogers (2003) had about the diffusion and adoption of innovations were useful insights in this study. According to him an innovation is an idea, way of working, practice or object that is perceived as new by individuals or other units of adoption. He stated that the adoption of an innovation goes through different stages and that some characteristics can hasten the degree of adoption of an innovation. These insights are considered to be very useful for the evaluation of a new PM system, because this system is in fact an innovation.

Individual commitment to a new system is considered to be gained during an internalization process an individual goes through. This process normally starts with resistance or rejection (no commitment) to the system and ends with a full commitment to it. Therefore, the degree of commitment to a new PM system can differ among individuals. This degree of commitment can be influenced by some characteristics of the PM system. On base of these thoughts the objectives of this study have been formulated:

One objective of this study is to provide insight into the extent to which employees are committed to the Performance Management practice and to indicate factors that can influence this commitment. Another objective of this research is to examine and compare the degree of commitment among the Dutch, Norwegian and British staff.

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A last aim is to provide recommendations about how this commitment might be increased.

On base of this, the following research questions have been formulated:

1. To what extent are employees committed to the Performance Management Framework of EPE and their performance agreements and to what extent does the degree of commitment differ among the Dutch, Norwegian and British staff?

2. How can the individual differences and differences among the three countries be explained?

3. Which recommendations follow from these issues?

On base of theoretical research, six hypotheses have been formulated for some variables that might have a direct or indirect effect on the degree of commitment to the PM system. It is expected that the variables understanding of the Framework

1 The research will focus on the production directorate and the commercial directorate of the organization.

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and feelings of involvement have a direct, positive effect on the degree of

commitment. Besides that, some variables have been introduced that were expected to have an indirect effect on the degree of commitment via understanding and/or involvement. Leadership (style), communication, cultural context and individual attributes are considered to be important here.

An employee questionnaire has been designed to answer the research questions and to test the six hypotheses. The questionnaire has been sent out to a sample of employees within the Production and Commercial Directorate of Shell EPE in Norway, the UK and the Netherlands. Data has been analyzed by doing scale analysis, meaning that the mean of the different scales (and items) is calculated per country. Besides that, multiple regression analyses have been carried out to test the six hypotheses. All the analyses have been done country-wise to explore different patterns of effect in the three countries.

The degree of commitment employees have to the Performance Management Framework is measured using a scale that was adapted from the Organizational Commitment Scale of Allen & Meyer. A low mean score (1) on the scale means that employees have no or a little commitment to the Framework. A high score (4) on the scale means that employees have a high degree of commitment to the Framework. Employees from the United Kingdom are more committed to the PM system (mean=2.67) than employees from the Netherlands (mean=2.27) and Norway (mean=2.39).

Regression analyses found support for some of the expected relationships with commitment. However, the Norwegian sample was too small to draw any conclusions. The most important conclusions of these analyses for the British as well as the Dutch sample will be given below:

British sample:

Three direct relationships with the degree of commitment have been found for this sample. At first, it turned out that understanding related positively and strongly significantly with the degree of commitment to the PM system. Second, (feelings of) involvement had a positive, but not significant effect on the degree of commitment in this country. Besides that, a positive and (approaching) significant relationship is found between the use of poor (impersonal) communication channels and the degree of commitment. Three indirect relationships with the degree of commitment via understanding were also found. At first, result-driven coaching is positively, but not significantly related to understanding. Second, people focus of leaders turned out to have a negative, but not significant effect on understanding for this sample.

The last relationship found is the positive and strongly significant effect the use of poor (impersonal) communication channels had on understanding.

Dutch sample:

Four direct relationships with the degree of commitment have been found for this

sample. Remarkably, understanding had no effect at all on the degree of

commitment. At first, a positive, but not significant relationship was found between

(feelings of) involvement and the degree of commitment. Secondly, result-driven

coaching was positively and significantly related to the degree of commitment. The

use of poor (impersonal) communication channels also had a positive and

significant effect on the degree of commitment in this country. Lastly, masculinity

turned out to have a negative, strongly significant effect on the degree of

commitment.

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Besides that, one relationship is found with understanding: result-driven coaching is

positively and significantly related to understanding of the PM system. Two indirect relationships with the degree of commitment via involvement were found. At first, self-efficacy turned out to be positively and significantly related to the (feelings of) involvement Dutch employees had. Besides that, the use of rich (personal) communication channels had a tiny positive, but not significant effect on involvement.

On base of this, a few recommendations for increasing the degree of commitment to the PM Framework were given:

- Create more involvement in the PM process as well as in setting the individual performance agreement. These measures will be appropriate for both countries according to regression results.

- Create more knowledge and understanding through awareness sessions for supervisors as well as employees. These measures will be appropriate in the UK, but it might have no effect in the Netherlands.

- Focus more on result-driven coaching as an important leadership style.

These coaching skills are important for the Dutch sample, but it might have no effect on the degree of commitment in the UK

- Improve the poor (impersonal) communication channels. Especially the digital channels, such as the PM website and Livelink can be improved and made more accessible. These measures are important for increasing the degree of commitment in both countries according to regression results.

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Preface

This thesis is written to finalize my study in Management and Organization at the University of Groningen. I have done this graduation research at Shell EPE for the last six months and it deals with Performance Management. This brings me at mentioning Human Resource Management as my specialization. Performance Management seems to be a hot issue in Human Resource Management land.

I almost reached a milestone in my life, finishing my study. I had a great time in Groningen and I can look back on a very satisfying study period. I learnt a lot and Human Resource Management as specialization has been a good choice. Especially after my internship at Shell I got a good overview of HRM in practice.

I really enjoyed my internship, of course there were some difficulties but overall I learnt a lot and had a great time. I want to thank Shell EPE for the possibilities they gave me.

First of all I would like to thank Mark Versteeg, my internal supervisor, for providing me this internship, for his supervision and for the other aspects of HRM he showed me. Dr. J.M. Horgan from the faculty of Management & Organization deserves my gratitude for her supervision and for the very interesting and constructive conversations we had concerning my research. I also like to thank Prof. dr. A.M.

Sorge for being my second supervisor of the faculty of Management &

Organizations.

Besides that, I would like to thank the respondents who collaborated in my research and completed the questionnaire. All the people from the HR department, thank you very much for the great time I had.

Last but not least, I want to thank my family and friends for supporting me in my study and in this graduation research.

Groningen, October 2004

Karin Stok

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Appendices:

Appendix 1 Questionnaire

Appendix 2 Outcome Factor analysis Appendix 3 Reliability of the scales

Appendix 4 Scores differentiated per directorate Appendix 5 Percentages scales communication Appendix 6 Overview answers on open questions Appendix 7 Correlation matrix

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Introduction

‘At a time of economic slowdowns and uncertainty, a concept as performance management is particularly tempting and increasingly popular. Many organizations implemented performance management systems to improve individual and organizational performance, often coupled with some sort of pay for performance system. But, how effective are such systems in really improving performance?’

(www.managementsite.nl)

This study deals with the evaluation of a Performance Management System. The research took place at the Nederlandse Aardolie Maatschappij (NAM) and is done for Shell Exploration and Production Europe (Shell EPE). The exploration and production activities, of gas and oil, in Norway, United Kingdom, Netherlands, Italy, Austria, Ireland, Denmark and Germany have been put together in this organization. This research has focused only on employees within Norway, United Kingdom and the Netherlands (NAM).

Since January 2004, a new Performance Management system has been introduced in this organization. The Performance Management Framework of Shell EPE will be explained in more detail in the next chapter. This research deals with the evaluation of and provides insight into employee’s degree of commitment to this Performance Management Framework.

The objectives of this research are:

One objective of this study is to provide insight into the extent to which employees are committed to the Performance Management practice and to indicate factors that can influence this commitment. Another objective of this research is to examine and compare the degree of commitment among the Dutch, Norwegian and British staff.

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A last aim is to provide recommendations about how this commitment might be increased.

The results of this research will indicate problem areas within the system according to employees. On base of this recommendations and insights into ways to improve the performance cycle of Shell EPE will be given.

In the first chapter a description of the organization NAM and the company Shell EPE will be given. This is done to give the reader an overview of the organization in which the research took place. There will also be given an overview of the Performance Management Framework, to give insight into the system this research deals with.

After that, the research will be introduced and explained in chapter 2. The insights and concepts, which had an important impact on the research direction, will be mentioned here. After that, the research questions and objectives will be discussed in more detail.

The theoretical framework will be described and explained in the third chapter. The theoretical concepts and insights introduced in chapter two will be explained in more detail here. The expectations of the author will be formulated in hypotheses.

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Next, in chapter four methodological issues will be discussed. This chapter provides

insight into the way the research questions will be answered. The data collection, data analysis and sources of information used will be described here.

In chapter five the results of the questionnaire will be described. Employee’s scores on the different scales on the questionnaire will be given and this will be differentiated per country. This chapter provides insight into the current degree of commitment employees have to the PM system and the current score on the expected influencers of this degree of commitment will also be given.

Using multiple regression analysis will test the hypotheses in chapter six. The effect of the influencers on the degree of commitment and the relationships between the different variables will be explored per country.

Chapter seven gives the main conclusions of this research and recommendations to

improve the Performance Management Framework will be given here.

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Chapter 1 Company background

1.1 Introduction

This graduation research took place at the Nederlandse Aardolie Maatschappij (NAM) in Assen and deals with performance management. Before making clear what the research is about, some background information of this company, which is a part of Shell, will be outlined. An insight into the practice Performance Management will also be provided, before going into more detail about the specific research.

1.2 Background of the company

1.2.1 About the Nederlandse Aardolie Maatschappij (NAM)

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Following the discovery of an oil field near Schoonebeek in 1943 by Exploration Nederland, which was a Shell company, Shell and Esso decided to jointly put up the capital needed for the undertaking of a new oil exploration and production company: Nederlandse Aardolie Maatschappij, or NAM for short. NAM was formed on 19 September 1947. Shell is the operating company of the NAM.

NAM made the first natural gas discovery in the Netherlands in Coevorden in 1948.

Just over ten years later, in 1959, NAM discovered the famous Groningen gas field near Slochteren. Slochteren is one of the biggest in the world, with original producible gas reserves of around 2,700 billion m³. That discovery also opened the door to offshore gas exploration and production and in 1961 NAM was the first company in Western Europe to drill for gas in the North Sea.

NAM is now the largest gas producer in the Netherlands, with an annual production of around 50 billion m³. Gas produced by NAM covers around 75% of the Dutch demand. NAM also continues to produce oil, around 0.8 million m³ a year or about 4% of the country's total oil requirement (50 million m³).

1.2.2 About Shell Exploration and Production Europe (EPE)

Since November 2003 NAM is part of Shell Exploration and Production Europe (from now: EPE). The exploration and production activities, of gas and oil, in Norway, United Kingdom, Netherlands, Italy, Austria, Ireland, Denmark and Germany have been put together in this organization. The three biggest players in EPE are:

•

NAM, who is operator in Netherlands and the Dutch part of the North Sea;

•

Shell U.K. Exploration & Production (Shell Expro), who is operator of the British part of the North Sea;

•

Norske Shell (Sepno), who is the operator in Norway.

1.2.3 Formal structure

EPE is part of the new worldwide Shell’s EP global business model, which is located in 5 regions: Europe, America, Asia/Pacific, Africa and Mid-East/Russia-Central Asia.

The purpose of this worldwide business model is to share worldwide knowledge and experience and to realize synergies in the global portfolio.

The CEO and the directors of the different directorates in EPE, called the EPE Leadership Team, lead the EPE organization. The following directorates exist within EPE: Commercial; Corporate Support; Finance; Human Resources; Non-Shell Operated Ventures (NOV); Production and Technical. On top of that you have Exploration Europe, New Business Development, IT and Legal; these directorates are working in global EP functions, but are allocated to EPE.

3 NAM intranet

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Schematically:

EP-Global:

Fig. 1.1 Formal Structure EPE

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This study will focus on the Production and Commercial directorates; therefore a short description of these directorates will be given.

Production Directorate:

In order to boost performance the Production Directorate is organized as a single organizational entity with six asset groups, supported by three pan-EPE functional groups. In the assets the production of gas takes place; the different plants are thus grouped into six assets. The asset groups focus on optimization and standardization of operational practices and business processes with clear accountabilities for overall asset performance. The functional groups (Engineering &

Maintenance, Production Services and Logistics) are responsible for driving best practices across the asset groups.

Commercial Directorate:

The Commercial Directorate has a key role in realizing the values associated with EPE. This is achieved

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through integration of supply planning across the European exploration and production business and across the upstream/downstream interface with Shell Energy Europe

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by propagating commercial best practices to all assets

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through a harmonized approach to dealing with partners and competitors

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by influencing the regulatory regime to enable aspirations and protect the

existing value base

4 Derived from Shell EPE intranet: Corporate Management System EPX-E

Exploration Europe

EPB-E

New business development

EPT-IT-E

IT Europe

EPE-L

Legal Europe

EPE

Human Resources

Production Finance

Technical

Commercial

Non-Shell Operated Ventures (NOV)

Corporate Support

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1.2.4 Vision and principles EPE

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The Shell Group goal is:

To be world leaders in energy and petrochemicals

Based on this EP Europe has defined the following vision:

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One networked, seamless European organization

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Leveraging global reach and local connectedness

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Unlocking value across borders

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With people who want to work here

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In the company of choice for all stakeholders The following objectives have been set:

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World class Health, Safety and Environment (HSE) performance

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30% cost improvement and 30 % more value

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Increased reserves replacement and production

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Full rate benefits by end 2004

1.3 Performance Management Framework EPE⁶

In this section the practice performance management will be explained in more detail, as this is the subject of this study.

One of the characteristics of EP Europe is a strong performance culture. In order for EP Europe to achieve the aspiration of 30% growth and 30% cost reduction targets by 2006, the performance of the organization has to be improved continuously. To realize this continuous improvement, the performance of the people working at all levels of the organization needs to be continuously improved.

To support this a Performance Management Framework has been put in place to provide a reinforcing structure for everyone (all job levels) working in EP Europe to understand their role in the big picture and how they can contribute to continuous improvement of the EPE performance.

The Performance Management Framework consists of 6 elements. Each element in the framework reinforces the next one in a repeated cycle. If one of these elements is omitted, the cycle will be broken and the performance management system shall not work properly. The 6 elements of this process alone will not deliver effective performance management; they need to be reinforced by EPE people having a clear understanding of the purpose of each element; developing the right skills and best practices; role-modeling the EPE values through the way we behave, all supported by active communications.

5 Shell EPE intranet

6 Shell EPE Performance Management website

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Schematically the framework looks like this:

P e rfo rm a n c e is w e ll d e fin e d a n d m o n ito re d a t a ll le v e ls . C le a r

ta r g e ts a n d a c c o u n ta b ilitie s

S tr e a m lin e d p e r fo r m a n c e p r o c e s s e s R ig h t

p e r fo rm a n c e c o n v e rs a tio n s R e w a r d

a n d im p ro v e m e n t C le a r b u s in e s s d ir e c tio n

P e rfo rm an c e ag re em en t

U n d e r p in n e d b y a c tiv e

c o m m u n ic a tio n s T h e rig h t p e r fo r m -

a n c e tr a c k in g A ll s ta ff u n d e rs ta n d th e

c o m m o n d ire c tio n a n d g o a ls

P e rfo rm a n c e is m a n a g e d th ro u g h o u t th e o rg a n is a tio n

E v e ry b o d y k n o w s w h a t is e x p e c te d o f th e m to d e liv e r

P ro v id e c h a lle n g e a n d s u p p o rt, a n d lo o k fo r a c tio n s to re c o v e r a n d im p ro v e . A p p ra is e re s u lts a n d b e h a v io u rs in s u p p o rt o f c u ltu re c h a n g e C o n s e q u e n c e s o f g o o d a n d u n d e rp e rfo rm a n c e a re m a n a g e d P e rfo rm a n c e is re v ie w e d to le a rn a n d p la n fo r im p ro v e m e n t.

A c c o u n ta b ility fo r p e rfo rm a n c e m a n a g e m e n t is w ith

th e lin e

Fig. 1.2 Performance Management Framework EPE

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In the next sections each part of the framework will be explained, as it ideally should be according to EPE.

1.3.1 Clear business direction

Everyone in EPE has a clear understanding of EPE’s business direction and goals and how these link to the outcome of their day-to-day work. EPE’s shared vision, and the strategies and targets by which it will be achieved, is communicated on an ongoing basis, in a way that supports people’s understanding of how their day-to- day work contributes to the bigger whole.

1.3.2 Clear targets and accountabilities

EPE Corporate Support prepares an annual scorecard for EPE containing high-level Key Performance Indicators (KPIs) and annual targets. The EPE KPIs and targets are cascaded down through the organization through individual face-to-face conversations between line managers and employees reporting directly to them.

Both parties agree on what is expected from the employee and they then capture the outcomes of these conversations in performance agreements. At the end, all staff members in EPE must have a clear understanding of what they personally are expected to deliver in terms of results and behaviors to achieve the common goals.

1.3.3 Right performance tracking

Performance is monitored continuously, so that line managers and direct reports can discuss performance and they can address any performance gaps in performance review meetings throughout the year. The process covers two elements:

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Tracking of business performance: the tracking of performance against business targets;

7 Shell EPE Performance Management website

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Tracking of individual performance: the tracking of performance against all

targets set in the performance agreement of each individual.

1.3.4 Streamlined performance processes

At every level of the organization there must be a schedule of review meetings to manage performance. These are formal monthly and quarterly team performance reviews, which roll up from the lowest through to the highest level in the organization. There will also be held informal ongoing individual performance conversations, between line managers and their employees reporting directly to them, focused on coaching. Apart from this, all staff will have at least one formal mid year review of their performance towards achieving their targets and to provide feedback to the individual on how well they are performing.

1.3.5 Hold performance conversations/evaluations

During performance review meetings, line managers and their directly reporting employees use performance management information to identify problem areas, they also agree to actions to recover, safeguard and improve performance. There will be team performance reviews and individual performance evaluations.

1.3.6 Reward and improvement

This will be done through the process of appraisal and reward. Key aspects of this process are:

- Annual individual appraisal: each staff member will be formally assessed at the end of the year on his or her results and behaviors. Results will be referenced against the promises made in the individual performance agreements. For the assessment of behavior (living the EPE values) the supervisor’s assessment will be the prime source.

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Performance ranking: the appraisal will be followed by a ranking process in which staff belonging to a specific depth and job level will be ranked, resulting in an individual performance factor (IPF). Ranking is done for a team, in which your individual performance will be scored in comparison with the performance of your team members (peers).

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Managing the consequences of performance: to reinforce a strong performance culture there should be a transparent follow-up to, and differentiation between, people who deliver on expectation, those whose delivery is outstanding and those who under- perform. The various consequences of performance are:

1. Monetary reward: the annual bonus and the annual merit increase will be strongly and transparently linked with performance.

2. Career progression: Although based on the candidate’s competency, promotion will also take into account the candidate’s performance.

3. Recognition: individuals will get frequent, timely and motivating recognition of their achievements.

This graduation research will focus mainly on the elements discussed in sections

1.3.2 and 1.3.3. Within these elements problem areas will be examined. A few

questions that come to mind are: How committed are employees to the goals

specified in their performance agreements? Do they know what is expected of

them? Do supervisors define and monitor performance? Etc. In the next chapter the

research will be discussed in more detail.

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Chapter 2 Introduction to research

2.1 Introduction

Parts of the Performance Management Framework, such as target setting and performance agreements have already been introduced. The performance management project team (HR part) wants to see a review of the implementation of these parts in order to determine how well these are working. An important aspect of this review is staff’s opinion about the usefulness of the Performance Management Framework and their performance agreements and the feedback they give for improvement.

The project team highlighted a few questions that are considered to be interesting for this review:

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Do employees know precisely what is expected of them and how they should behave?

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Has there been enough communication with all employees? Or has the engagement of the framework been focused around line-managers and higher levels?

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Are employees committed to their performance agreement?

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To what extent are employees committed to the new practice ‘performance management’?

If the framework does not work effectively, the consequence may be that the performance of the organization cannot be continuously improved upon. As long as employees do not know their role in the big picture, they cannot contribute to continuous improvement of the EPE performance. For an effective use of the PM Framework, employees must see the usefulness of it and become committed to the system.

Before mentioning the research questions and objectives, the author will make clear which concepts were ‘leading’ in determining the direction of this research.

These concepts were important in sharpening the above questions of Shell and in deciding how to carry out this research. First of all, the concept performance management is very important here. Performance management systems can be very useful for organizations, but there are also a lot of flaws. It is important to keep this in mind when evaluating (the effectiveness of) the Performance Management Framework. Besides that commitment to a new performance management system is an important starting point for this research. For the success of such a system it is very important that employees belief in it and accept the ideas and practices behind it. These two concepts determined and influenced the research direction and research objectives; this will be explained in the next two sections.

2.2 Performance Management

Performance management is a broad term that has come to stand for the set of practices through which work is defined and reviewed, capabilities are developed, and rewards are distributed in the organization.

PM can be seen as the process in which managers and employees work together on setting goals, giving feedback, reviewing and rewarding performance.

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8 Rheem, H., ‘Performance management’, In: Harvard Business review, may 1995, p.11

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It is a means of getting results from the organization, teams and individuals by

understanding and managing performance within an agreed framework of planned goals, standards and attribute/competence requirements. It is a process for establishing shared understanding about what is to be achieved, and an approach for managing and developing people in a way which increases the probability that it will be achieved in the short and the long term. It is based on the simple proposition that when people know and understand what is expected of them and have been able to take part in forming those expectations, they can and will perform to meet them.

⁹

Performance management systems are primarily set up by organizations to improve organizational and individual performance. Shell EPE also introduced the PM Framework in order to improve their performance. But, research of de Waal en Ardon (2002) shows that 60% of the organizations, which implemented a PM system, did not improve their performance at all.

Mohrman and Mohrman

¹⁰

think that the lack of success with PM is due to the fact that prevailing human resource management approaches were designed to fit a traditional, hierarchical organization. And the recent increased emphasis on the lateral organization, with teams performing in fluid and dynamic patterns, threatens the viability of management approaches that assume clearly defined job roles and responsibilities.

Therefore, PM does not always work effectively and it has some flaws. According to Egan (1995)

¹¹

there are five main flaws of a performance management system.

First, the PM system often carries trivia rather than substance. It should focus on those relatively few key strategy objectives that will add the most value to the business. Operational objectives clog the system. Second, PM is not only appraisal.

Appraisal is retrospective; it only takes place at the end. Performance improvement should be prospective and ongoing. Appraisal only makes sense when it is tied to a performance improvement process. The third flaw is that a PM system will often be perceived as an imposed control system. Most employees want direction, freedom to get their work done, and encouragement, not control. To overcome this, the focus of a performance management system should lie on development. Fourth, most supervisors do not have the skills needed to make PM work. A fifth flaw is that most PM systems take a “one size fits all” approach. A system should be flexible and as simple as possible.

Many PM systems are coupled with some sort of pay for performance systems. As described in chapter one, the Performance Management Framework of Shell EPE is also coupled with a variable performance-related reward system. The range of opinion about pay for performance is broad and deep. Proponents say that rigorous, long-term pay for performance systems offer effective methods of helping companies continually improve the workforce while getting and keeping the best people. Opponents argue that incentive pay plans tend to pit employees against one another, erode trust and teamwork and create what critics call dressed-up sweatshops.

¹²

Incentives do not alter the attitudes that underlie our behaviors. They do not create an enduring commitment to any value or action. At least two dozen studies have

9 Armstrong, M., Performance management, London: Kogan Page Limited, 1994, p.23-24

10Mohrman, A.M. & S.A. Mohrman, ‘Performance management is running the business’, In:

Compensation & Benefits review, July 1995, p. 68

11Egan, G., ‘A clear path to peak performance’, In: People Management, May 1995, p.34-36

12 Wiscombe, J., ‘Can pay for performance really work?’ In: Workforce, august 2001, p. 28

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conclusively shown that people who expect to receive a reward for completing a

task or doing that task successfully simply do not perform as well as those who expect no reward at all.

¹³

Organizations should be careful with pay for performance systems as a mean to improve individual performance. Intrinsic motivation can be considered as a more important aspect for improving performance.

Organizations must realize that only the implementation of performance management is not the solution for improving performance. It is not as simple as meeting once a year to review the past year’s performance and set goals for the coming year. Feedback, coaching, tracking, behavioral data gathering, and preparing for performance planning and review all require time and commitment to make them work. Organizations must take the time and effort needed to hold managers accountable for properly modeling the process, align the performance management systems with organizational systems, and provide training at all levels to ensure understanding and commitment. The result can be a system that accomplishes much more than it once did and a workforce that has higher satisfaction and commitment than it once had.

It is stated here that PM is a frequently used system by organizations in order to boost their performance. PM systems can be very useful tools for organizations, but there are also problems and difficulties with such systems. PM systems are not always successful; there are many flaws that can prevent organizations from improving their performance.

The author thinks that resistance of a PM system by employees can be seen as an important impediment for the success of a PM system. As long as there is resistance by employees for such a system, it cannot work effectively. An effective performance management system requires the commitment of all managers and employees involved. A system can only be effective when they internalized the ideas and practices behind the system and thus have commitment to the system.

This other important concept, commitment, will be discussed in more detail in the next section.

2.3 Commitment

‘Organizational commitment is an individual’s belief in and acceptance of the goals and values of an organization, a willingness to work hard on behalf of the organization and a strong desire to remain in the organization.’

¹⁴

A person develops or gets commitment when going through an internalization process. The author thinks that it is not only the acceptance of the goals and values of an organization in total, but there is more an individual can have commitment to.

Commitment is also important in organizational change processes, in the introduction of new ways of working, in the implementation of new systems, etc.

Commitment can be considered to be the opposite of resistance and thus is a requirement for success. Without commitment all these changes will not be successful and effective. In this study, commitment to the new Performance Management Framework will be explored in detail.

13Kohn, A., ‘Why Incentive Plans cannot work’, In: Harvard Business review, September-October 1993, p.55

14Porter, Steers, Mowday & Boulian (1974)

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Ideas from Rogers about the diffusion of innovations are appropriate and useful

here. He wrote about the diffusion and adoption of technical or non-technical innovations. According to him an innovation is an idea, way of working, practice or object that is perceived as new by individuals or other units of adoption. Most of the new ideas are technical innovations, but also a new practice or different way of working can be seen as an innovation.

¹⁵

Adoption concentrates especially on the decision to use an innovation or do not use it.

This work is normally applied at the organizational level, here the insights regarding the problems encountered during the change process are considered to be useful and appropriate to help understand commitment behavior at the individual level.

The author thinks the insights of this work can be useful for the evaluation of the introduction of a new PM system, because an innovation can include a wide range of changes in organizations with a renewal or new component in it. What is important is the newness of the innovation for an individual, whether it is a technical or non-technical innovation. Therefore, this work gives very useful insights for organizational change processes and for the introduction of new working systems. The Performance Management Framework of Shell can be seen as a relative new system or way of working for all employees and managers.

The process of actually accepting and internalizing an innovation (or organizational change) is very important here. Rogers states in fact that innovations differ in the rate of adopting it. The adoption of an innovation goes through different stages; it starts with the knowledge stage, in which people get knowledge and understanding of the innovation, and ends with the confirmation stage, in which people actually use the innovation and seek reinforcement.

¹⁶

In each stage the internalization of the innovation goes a step further.

Also Tolbert and Zucker (1996)

¹⁷

see the adoption of a practice arise in different stages. They suggest three basic stages: pre-institutionalization, semi-

institutionalization and full institutionalization of a practice. Few adopters and

a limited knowledge about the practice characterize the first stage. In the semi- institutionalization stage, the practice is fairly diffused and has gained some degree of acceptance, but it has a relatively short history. In the last stage, the practice has taken for granted by members of a social group as efficacious and necessary.

According to Kostova and Roth (2002)

¹⁸

practice adoption can be conceptualized into two dimensions: implementation and internalization. Implementation is expressed in the external and objective behaviors and the actions required, or implied, by the practice. Internalization is that state in which the employees at the recipient unit view the practice as valuable for the unit and become committed to the practice. These two dimensions reflect the level or depth of adoption of the practice.

Adapted from these ideas of Rogers and the other authors, individual commitment will also be considered by the author as going through different stages. Every individual goes through a different acceptation and internalization process. This process normally starts with little or no commitment (resistance) and ideally ends with full commitment to a new system. Some will internalize the ideas and practices

15 Rogers, E.M., Diffusion of innovations, 2003, p.11 and further

16Rogers, E.M., Diffusion of innovations, 2003, p-168-194

17 In: Kostova, T. & K. Roth, ‘Adoption of an organizational practice by subsidiaries of multinational corporations: institutional and relational effects’, In: Academy of Management Journal, 2002, p. 216

18 Kostova, T. & K. Roth, ‘Adoption of an organizational practice by subsidiaries of multinational

corporations: institutional and relational effects’, In: Academy of Management Journal, 2002, p. 216-217

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behind the new system quickly and thus become fully committed to it. For others,

the internalization process takes much longer. There will also be people who do not reach the full commitment stage or/and who reject the system and never become committed to it.

Therefore, it can be stated here that the degree of commitment an individual has to a new system can differ over time and among individuals. Commitment to a new performance management system can range from no commitment at all to full commitment to it, meaning a full internalization of the ideas and practices behind the system.

Rogers also gives indications concerning characteristics of innovations that can influence or hasten the rate of adoption. An innovation will be adopted more rapidly when this innovation is compatible with existing norms and values, when the users think the innovation has a relative advantage compared to former innovations and the innovation should be easy to understand (complexity). These characteristics can also be adapted and used in this study in which the individual commitment to a PM system is the case. The system should be compatible with the norms and values of the employees, employees must see the system as advantageous over the past practices and the system should be easy to understand. These characteristics are expected to positively influence the degree of commitment an individual has.

All these insights and expectations of the author will be explored and explained in more detail in the next chapter, in which the theoretical framework will be discussed.

2.4 Research objectives

On base of these thoughts, derived from the two leading concepts in this research, the following research objectives can be formulated:

One objective of this study is to provide insight into the extent to which employees are committed to the Performance Management practice and to indicate factors that can influence this commitment. Another objective of this research is to examine and compare the degree of commitment among the Dutch, Norwegian and British staff.

¹⁹

A last aim is to provide recommendations about how this commitment might be increased.

On base of these objectives, the following research questions have been formulated:

4. To what extent are employees committed to the Performance Management Framework of EPE and their performance agreements and to what extent does the degree of commitment differ among the Dutch, Norwegian and British staff?

5. How can the individual differences and differences among the three countries be explained?

6. Which recommendations follow from these issues?

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For this research some boundary conditions can be mentioned:

•

The research has to be completed within 6 months.

•

The research will focus on staff of EPE in the Netherlands, United Kingdom and Norway.

•

The research will focus on the Production Directorate and the Commercial Directorate of EPE.

•

The research must refer to all salary/job groups (1-15) within EPE

•

The research will focus mainly on the first part of the Performance Management Framework (performance agreement & performance tracking), because the rest of the Framework is still in progress and it is thus not possible to evaluate these parts.

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Chapter 3 Theoretical Framework

3.1 Introduction

In this chapter the ideas and thoughts mentioned in chapter 2, which determined the direction of this research, will be explored and discussed in more detail.

As stated in the former chapter, performance management systems do not necessarily function well. For the success of such a system, it is important that employees have commitment to the ideas and practices behind it. The degree of commitment can differ among employees. Getting commitment can be seen as an internalization process that starts with resistance to the system and ends with a full commitment to it. Besides that, the three characteristics of Rogers are considered to be important in influencing this internalization process and therefore the degree of commitment. These ideas of the author will be presented in the following conceptual model:

Complexity,

Relative advantage

& Compatibility

Figure 3.1 Conceptual model

This model exists of 2 parts, namely A and B. In part A the expected direct relationships with commitment are given. In this study understanding and involvement are expected to have a direct effect on commitment. All of this will be explained in the following section and tested in chapter six of this thesis. In part B the expected indirect relationships with commitment are shown. These variables

(Degree of) Commitment Understanding

(Complexity)

Involvement (Relative advantage) Individual attributes:

self-efficacy; age, gender, job-group, work years

Organizational context:

Culture, country

Organizational practices:

-Communication -Leadership style

A

B

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seem important in influencing the degree of commitment to a PM system, but they

are expected to influence commitment via understanding and/or involvement. This will be discussed in more detail in section 3.3 and tested in chapter six of this thesis.

3.2 Part A: direct relationships

In this section the expected direct relationships with commitment will be explored.

First of all, some insights about commitment and resistance to a new system will be given. Resistance is considered to be the opposite of commitment to a system.

After that, the variables understanding and involvement will be discussed and their role in influencing the degree of commitment will be made clear.

3.2.1 Resistance and commitment

When a new PM system is introduced or other organizational change processes occur, resistance by employees can be expected. The author thinks that resistance by employees blocks internalization and thus the degree of commitment.

Every organizational change affects people working in the organization. Hereby it is important to keep in mind that the success of an organizational change depends on the people working in the organization. They are the ones who need to accept and internalize the ideas and practices behind the change. While resistance to the changes persists, the change will not be successful, as employees are not committed to the change. In fact, resistance of employees can be considered to be the opposite of commitment to a new system.

Resistance to change is an emotional/behavioral response to real or imagined threats to an established work routine. It can be as subtle as passive resignation and as overt as deliberate sabotage.

²⁰

To overcome and to manage resistance, one needs to know why people resist change.

Kreitner and others (1999)

²¹

mention ten leading reasons why people can have resistance to change:

1. An individual’s predisposition toward change. It is an outgrowth of how one learns to handle change and ambiguity as a child.

2. Surprise and fear of the unknown. When changes are introduced without warning, affected employees become fearful of the implications.

3. Climate of mistrust. Trust involves reciprocal faith in another’s intentions and behaviors. Mistrust can doom to failure change.

4. Fear of failure. Intimidating changes on the job can cause employees to doubt their capabilities.

5. Loss of status and/or job security. Changes that threaten to alter power bases or eliminate jobs generally trigger strong resistance.

6. Peer pressure.

7. Disruption of cultural traditions and/or group relationships.

8. Personality conflicts.

9. Lack of tact and/or poor timing.

10. No reinforcing reward systems.

Also Blank (1990)

²²

has identified some reasons to resist change:

•

Insecurity: One cause of insecurity can be lack of confidence in the person advocating the change. This highlights the need of quality professionals to

20 Kreitner, Kinicki & Buelens, Organizational behavior, 1999, p.594

21 Kreitner, Kinicki & Buelens, Organizational behavior, 1999, p.594-596

22 Blank, R.E., ‘Gaining acceptance: the effectiveness of new ideas’, In: Total quality management, 1990, p.69

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build and maintain their credibility. Another cause of insecurity can be that

the person is unsure about their own ability to do whatever the change requires of them. Job security can also be important here; change is often seen as getting more done while needing fewer people.

•

Necessity: Understanding the need for a change is fundamental to believing that the change is necessary. Convincing someone that the change is necessary can go a long way towards overcoming resistance. The change should benefit the employee in some way.

•

Prejudices: If a person has had a bad experience with another person, place, or thing, they may develop a prejudice against it. In many cases prejudice is the result of either a negative experience or ignorance.

•

Communication problems: Not understanding what is expected from you can be the result of a communication problem. In fact, many of the solutions to resistance rely on communication. Ineffective communication is itself a cause of resistance.

Bacal (2001) has identified some specific criteria why employees feel uncomfortable by the introduction of a PM system. According to him employees are eager to have resistance to a new PM system when

²³

:

•

They have had a bad experience with other PM systems.

•

They have the feeling of being criticized.

•

They don’t know what can be expected or what’s expected of them (they get an uncomfortable feeling with PM).

•

They don’t understand the importance of PM.

Now we know what might be reasons for people to resist change, commitment will be discussed here. The author made clear in chapter two that commitment to a new (PM) system can be reached in different ‘stages’. During the internalization process of an individual, feelings of commitment get more intense. The process starts with the introduction of a new system that is perceived as new by employees. They have little or no commitment to it, because they have not internalized the ideas and practices behind this new system. In fact, there is a lot of resistance by employees to the change in this stage. During time, they can decide not to belief in such a system and thus reject it or accept it and belief in the system. When they belief in such a system and actually use it, the resistance by employees to the change disappears and they become more and more committed to it.

Therefore, the degree of commitment to a new (PM) system can range from resistance/rejection (no commitment) to full commitment of it (internalization process)

Schematically:

Figure 3.2 internalization process

23 Bacal, R., Prestatiemanagement, 2001, p.16-21

Rejection/resistance Full commitment

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3.2.2 Conclusion

In this chapter resistance and commitment have been discussed. Resistance can be considered to be the opposite of commitment to a new system. Different reasons to resist change were mentioned here; most of them can be reduced to a few reasons.

Ineffective communication can be seen as an important reason to resist change.

Besides that, not understanding the need for the change is also important. It is stated here that the degree of commitment can range from resistance/rejection (no commitment) to full commitment to a new system.

An important question in this case is the following: What is important in getting employees more committed to the new PM system? In other words, what will prevent employees from rejecting or resisting it? In chapter two it is stated that the PM system should be compatible with the existing norms and values of the employees. Besides that, the system should not be too complex so that it is easy to understand and employees should see the system as advantageous over the past systems. The conceptual model shows that the variables understanding and involvement are expected to influence the degree of commitment directly. This will be discussed in the next sections.

3.2.3 Understanding and involvement

In this section the effect understanding and involvement might have on the degree of commitment will be explored. The author expects that these two variables have a direct relationship with commitment, because they directly deal with complexity and relative advantage. Complexity has to do with understanding, because a system must not be too complex, otherwise employees will not understand it.

Involvement has to do with the perceived advantage of the system by employees.

When employees feel involved in the introduction of a new system, it is likely they see the benefits of the system sooner. Feelings of owing the new system or practice might be there and they feel more personal committed to the new system. Let us first consider the relationship between understanding and commitment.

Understanding:

As stated before the complexity of an innovation can influence its rate of adoption.

Complexity is the degree to which an innovation is perceived as relatively difficult to understand and use. For new ideas or practices complexity is a very important barrier to adoption.

²⁴

Therefore, it is important to reduce the complexity of an innovation. These ideas of Rogers can be adapted to indicate the ideas the author has about individual commitment to a new system. In order to make a success of the new performance management system, it is important that employees understand it. It is not possible to use a system and belief in the ideas behind it, when employees do not understand this. Therefore, understanding of the system by employees can be seen as an important requirement of commitment. Only when employees get or have understanding and knowledge of the system, they can internalize the ideas and practices behind it. In this process, they can decide to reject the system or decide to belief in it and accept and use the system. When the last is the case, they become committed to it.

Therefore, understanding of the Performance Management Framework can be seen as a necessary requirement of commitment. Without understanding the internalization process cannot get started (or get a step further), because the people who have to work with the PM Framework conceive it as (too) complex.

24Rogers, E.M., Diffusion of innovations, 2003, p.257

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Based on this, the author expects a direct, positive relationship between

understanding and commitment:

H1: The more employees understand the EPE Performance Management Framework; the more committed employees are to the PM system.

(Understanding has a positive effect on commitment)

Involvement:

Besides understanding, the author expects a direct relationship between commitment to a new system and involvement of employees. As stated before, involvement has to do with the perceived relative advantage of the system. When employees feel involved in decision-making or their opinion about the new system is asked, they are expected to have less resistance. Involvement is considered to be having a positive effect on the internalization process. When employees feel involved, they probably have a more personal feeling of ‘owing’ the result or system. This way, they might see the benefits of the system more quickly.

Commitment to the system is expected to be the result of this feeling.

According to Stoter (1997)

²⁵

employees should get the opportunity to give their opinion about a change project and they should get the opportunity to show their doubts about a change project. This involvement can have a positive effect on the attitude of employees about the change, in this case the new practice performance management. This positive attitude can lead to a quicker acceptance, because employees see the advantages and benefits of the practice more quickly.

Also Kluytmans (2001) identifies the importance of involvement in organizational change programs. When employees are involved or engaged in organizational change projects, they get a feeling of owing the final result of the change project.

This eventually will lead to less resistance and a quicker acceptance of the change project.

²⁶

In this case, involvement in setting a performance agreement is also important.

Goals should be agreed in mutual agreement. It is not motivating for employees to achieve goals that are set without their involvement. Employees should be involved in setting goals, because they then have the feeling of owing the goal and feel accountable for achieving it.

²⁷

Participation in goal setting leads to more challenging goals than directive techniques do and it implies an internalization process; by accepting the shared goal and by being committed to it, that goal turns into a personal goal.

²⁸

Therefore, when employees are involved and feel involved in a change project or in setting goals, the internalization process can take place. Involvement can eventually lead to less resistance and a quicker acceptance of a change project (in this case the new PM system). Internalization means that employees feel owner of the final result and see the benefits of it more quickly and become committed to this final result.

On base of this, the following hypothesis can be made:

H2: The more involved employees feel, the more committed employees are to the PM system (involvement has a positive effect on commitment).

25 Stoter, A., De communicerende organisatie, 1997, p. 166-167

26 Kluytmans, F. (ed.), Leerboek personeelsmanagement, 2001, p.461

27 Stewart, A.M., Empowerment, inspireren tot zelfsturing, 1996, p.97-98

28 Sagie, A. & M. Koslowsky, Participation and empowerment in organizations, 2000, p.71-79

Supervisors Faculty of Management & Organization:

Groningen, October 2004 Author: Karin Stok

Student number: 1153358 University of Groningen

Faculty of Management & Organization Shell Exploration & Production Europe Supervisor:

Dhr. M.F. Versteeg

Supervisors Faculty of Management & Organization:

Dr. J.M. Horgan (first)

Prof. dr. A.M. Sorge (second)

Management Summary

This study has been carried out for Shell Exploration and Production Europe (EPE).

A last aim is to provide recommendations about how this commitment might be increased.

On base of this, the following research questions have been formulated:

1. To what extent are employees committed to the Performance Management Framework of EPE and their performance agreements and to what extent does the degree of commitment differ among the Dutch, Norwegian and British staff?

2. How can the individual differences and differences among the three countries be explained?

3. Which recommendations follow from these issues?

On base of theoretical research, six hypotheses have been formulated for some variables that might have a direct or indirect effect on the degree of commitment to the PM system. It is expected that the variables understanding of the Framework

and feelings of involvement have a direct, positive effect on the degree of

commitment. Besides that, some variables have been introduced that were expected to have an indirect effect on the degree of commitment via understanding and/or involvement. Leadership (style), communication, cultural context and individual attributes are considered to be important here.

Regression analyses found support for some of the expected relationships with commitment. However, the Norwegian sample was too small to draw any conclusions. The most important conclusions of these analyses for the British as well as the Dutch sample will be given below:

British sample:

The last relationship found is the positive and strongly significant effect the use of poor (impersonal) communication channels had on understanding.

Dutch sample:

Four direct relationships with the degree of commitment have been found for this

sample. Remarkably, understanding had no effect at all on the degree of

commitment. At first, a positive, but not significant relationship was found between

(feelings of) involvement and the degree of commitment. Secondly, result-driven

coaching was positively and significantly related to the degree of commitment. The

use of poor (impersonal) communication channels also had a positive and

significant effect on the degree of commitment in this country. Lastly, masculinity

turned out to have a negative, strongly significant effect on the degree of

commitment.

Besides that, one relationship is found with understanding: result-driven coaching is

On base of this, a few recommendations for increasing the degree of commitment to the PM Framework were given:

- Create more involvement in the PM process as well as in setting the individual performance agreement. These measures will be appropriate for both countries according to regression results.

- Create more knowledge and understanding through awareness sessions for supervisors as well as employees. These measures will be appropriate in the UK, but it might have no effect in the Netherlands.

- Focus more on result-driven coaching as an important leadership style.

These coaching skills are important for the Dutch sample, but it might have no effect on the degree of commitment in the UK

- Improve the poor (impersonal) communication channels. Especially the digital channels, such as the PM website and Livelink can be improved and made more accessible. These measures are important for increasing the degree of commitment in both countries according to regression results.

Preface

I really enjoyed my internship, of course there were some difficulties but overall I learnt a lot and had a great time. I want to thank Shell EPE for the possibilities they gave me.

Sorge for being my second supervisor of the faculty of Management &

Organizations.

Besides that, I would like to thank the respondents who collaborated in my research and completed the questionnaire. All the people from the HR department, thank you very much for the great time I had.

Last but not least, I want to thank my family and friends for supporting me in my study and in this graduation research.

Groningen, October 2004

Karin Stok

Table of contents

Appendices:

Introduction

(www.managementsite.nl)

The objectives of this research are:

A last aim is to provide recommendations about how this commitment might be increased.

The results of this research will indicate problem areas within the system according to employees. On base of this recommendations and insights into ways to improve the performance cycle of Shell EPE will be given.

After that, the research will be introduced and explained in chapter 2. The insights and concepts, which had an important impact on the research direction, will be mentioned here. After that, the research questions and objectives will be discussed in more detail.

The theoretical framework will be described and explained in the third chapter. The theoretical concepts and insights introduced in chapter two will be explained in more detail here. The expectations of the author will be formulated in hypotheses.

Next, in chapter four methodological issues will be discussed. This chapter provides

insight into the way the research questions will be answered. The data collection, data analysis and sources of information used will be described here.

Using multiple regression analysis will test the hypotheses in chapter six. The effect of the influencers on the degree of commitment and the relationships between the different variables will be explored per country.

Chapter seven gives the main conclusions of this research and recommendations to

improve the Performance Management Framework will be given here.

Chapter 1 Company background

1.2.1 About the Nederlandse Aardolie Maatschappij (NAM)

NAM made the first natural gas discovery in the Netherlands in Coevorden in 1948.

1.2.2 About Shell Exploration and Production Europe (EPE)

NAM, who is operator in Netherlands and the Dutch part of the North Sea;

Shell U.K. Exploration & Production (Shell Expro), who is operator of the British part of the North Sea;

Norske Shell (Sepno), who is the operator in Norway.

1.2.3 Formal structure

EPE is part of the new worldwide Shell’s EP global business model, which is located in 5 regions: Europe, America, Asia/Pacific, Africa and Mid-East/Russia-Central Asia.

The purpose of this worldwide business model is to share worldwide knowledge and experience and to realize synergies in the global portfolio.

Schematically:

EP-Global:

Fig. 1.1 Formal Structure EPE

This study will focus on the Production and Commercial directorates; therefore a short description of these directorates will be given.

Maintenance, Production Services and Logistics) are responsible for driving best practices across the asset groups.

The Commercial Directorate has a key role in realizing the values associated with EPE. This is achieved

through integration of supply planning across the European exploration and production business and across the upstream/downstream interface with Shell Energy Europe

by propagating commercial best practices to all assets

through a harmonized approach to dealing with partners and competitors

by influencing the regulatory regime to enable aspirations and protect the